RBI’s best efforts to keep benchmark yields stable through auction cancellations, auction devolvement, bond purchases through OMO, G-SAP, moral suasion, high system liquidity and ambitious inflation forecasts have not been successful with segments of the yield curve rising sharply. Bond markets are showing concern on rising inflation expectations and high fiscal deficit.
Although India received above average rain during June 21, the rainfall distribution was unequal throughout the month. This is evident from the data that by 21st June, India had already received 37% above normal rainfall while during 21st to 30th June, domestic rainfall was 47% below normal rainfall.
The below normal monsoons since 21st June 2021 have given rise to prospects of high food prices even as global oil and commodity prices are rising sharply. The government announced additional stimulus of over Rs 6 trillion last week to counter the disruptions caused due to covid 19 lockdowns. This will increase the already high fiscal deficit from budgeted 6.8% of GDP levels.
Commodity | 1-year change (%) |
Silver | 45.24 |
Copper | 58.54 |
Nickel | 41.25 |
Aluminum | 60.54 |
Brent Oil | 77.71 |
Crude Oil | 86.30 |
The yield on 6.57% 2033 bond at 6.7% is 65bps above the 5.85% 2030 bond, the yield of which RBI is controlling. The 7.16% 2050 bond yield is at 7.16% levels, 110bps over the 10 year bond. Yields on these bonds have spiked in the last one month. SDL yields too have risen sharply.
During last one month, 5.85% 2030 gained 5 bps to 6.06% while 6.57% 2033 rose by 13 bps to 6.70%. In the same line 7.16% 2050 increased by 17 bps to 7.13% during the same period. Average 10-year SDL auction cut-off rose to 6.94% from 6.84% during June 2021.
RBI is still trying to manage the yields on the benchmark bonds by changing the auction methodology from multiple price, which allows the market to bid at the price it wants to uniform price, which makes RBI give the bonds to the market at a single cut off price. RBI also devolved most of the benchmark 5 year bond auction on to the primary dealers in the last auction.
Government bonds, SDL and OIS yield movements
During the week, 5.85% 2030 yield rose by 3 bps to 6.06% while the 5.77% 2030 yield increased by 3 bps to 6.27%. 5-year benchmark bond, 5.22% 2025 yield rose by 5 bps to 5.61%. 6.57% 2033 yield rose by 10 bps to 6.70%. Long-term paper, 7.16% 2050 yield gained 4 bps to 7.13%.
The spread of 10-year bond over 5-year bond (5.22% 2025) declined to 45 bps from 47 bps in previous week. The 15-year benchmark over 10-year benchmark spread rose to 64 bps from 57 bps while 30-year benchmark over 10-year benchmark spread decreased to 108 bps from 109 bps.
Average 10-year SDL auction cut-off rose to 6.94% from 6.86% during previous week. Consequently, spread increased to 94 bps from 84 bps during previous week.
On weekly basis, 1-year OIS yield rose by 1 bp to 3.94% while 5-year OIS yield decreased by 2 bps to 5.41%.
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